OPTIMALITY AND STATE PRICING IN CONSTRAINED FINANCIAL MARKETS WITH RECURSIVE UTILITY UNDER CONTINUOUS AND DISCONTINUOUS INFORMATION

Mark Schroder and Costis Skiadas

Mathematical Finance, 2008, vol. 18, issue 2, 199-238

Abstract: We study marginal pricing and optimality conditions for an agent maximizing generalized recursive utility in a financial market with information generated by Brownian motion and marked point processes. The setting allows for convex trading constraints, non‐tradable income, and non‐linear wealth dynamics. We show that the FBSDE system of the general optimality conditions reduces to a single BSDE under translation or scale invariance assumptions, and we identify tractable applications based on quadratic BSDEs. An appendix relates the main optimality conditions to duality.

Date: 2008
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https://doi.org/10.1111/j.1467-9965.2007.00330.x

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